- Stellar payrolls report feed the risk-currency fire, but USD ends the day flat
A sharp knee-jerk negative dollar reaction to what was a stellar US employment report was subsequently tempered by the sharp back-up in US Treasury yields and questioning not only of the likelihood of additional QE measures by the Fed but also the plausibility of the FOMC’s conditional commitment to keeping rates ultra-low though at least late 2014. Indeed, while equities held on to their 1% initial gains, the DXY version of the dollar index ended NY trade little different from either its pre-payrolls or Asian opening levels. However, this was not because EURUSD was weak, the latter also closing pretty flat on the day. Rather, the USD advanced against both the JPY and CHF. As such, we repeat that it is premature to think in terms of a structural break in the risk/USD relationship. Factors cautioning against an unbridled positive interpretation of the employment report included the size of the seasonal adjustment factor in January (2.9m), the fact that the number of people unavailable for work because of weather was, at 206k, 278k below the average of the past three years, and that the unemployment report would have risen to 8.6% from 8.5% rather than the drop to 8.3% if the participation rate had not fallen by a further 0.3% to 63.7%. That said, a stronger than expected non-manufacturing ISM index (56.8 from 52.6) including a jump in the employment sub-index, supports the view that the economy entered 2012 with good momentum.
- As time runs out, conflicting reports from Greece raise concerns
But even if the news from the US is positive, risk is likely to struggle to advance as market focus shifts squarely back on Greece. Despite reassurances through last week that a deal on the second bailout/PSI was all but assured, it is clear from weekend developments that some serious obstacles remain. While leaders of Greece’s three main political parties were said to come to a broad agreement on further budget cuts, they will reconvene this morning for further discussion of the details. The participants have been given (yet another) deadline of noon (10am GMT) this morning in order to allow discussion of the agreement at the Euro Working Group ahead of this week’s EcoFin. It is easy to view the Greek resistance as a negotiating tactic to wrest concessions from the EU and IMF given that Greece is still seen have significant leverage in negotiations in so far as the eurozone financial system is not yet seen to be in a position to deal with a disorderly Greek default and possible EMU/EU exit. It can also be seen as domestic politicking ahead of the April elections (no-one willing to be seen to be backing more austerity until backs are completely to the wall later this month).
- Bullard, Fisher to first post-payrolls Fed commentary
EURAUD and EURNZD made new record lows Friday and we look for the downtrend to extend this week. The former is likely even if the RBA does cut rates on Tuesday (market pricing of which runs at about 70%; 24 of 27 analysts polled by Bloomberg expect a cut). Australian retail sales disappointed this morning, and the private TD Securities inflation measure also came in soft – both should, at the margin, improve the chances of a cut. On the assumption that a cut is indeed delivered, then focus will be on the accompanying Statement. If the RBA signals that – short of a significant deterioration in external conditions – it is at the end of this round of easing, then AUDUSD should quickly find a base from which to rally. For today, German factory orders is the only release of note. Greater interest may be shown in the first post-payrolls Fed speak, courtesy of the St. Louis Fed’s Bullard and the Dallas Fed’s Fisher – the latter a hawk who on Friday (pre-NFP) described all FOMC forecasts as ‘pure guesses’. He will doubtless repeat that he sees no need for more QE.
BNP Paribas